Western Australia is THE export state for agricultural products. No matter how much you squint and turn you head sideways, Western Australia’s puny 2.7 million population cannot sustain our sizeable food and agriculture industry. We have no choice but cross the expanse of desert or sea to find a buyer for most of our wares. The major markets across the desert are 4,000km away but they cannot hold a candle to what starts only 3,000km to our north via sea. Indonesia’s population alone is ten times Australia’s (and 100 times WA’s) and you don’t need to go much further north to find hundreds of millions more potential buyers of Australian agricultural produce. The only practical way to get millions of tonnes of product into these markets is by bulk or containerised sea freight.
So, given our reliance on boats, when we hear the cost of sea freight is rising, should that make us concerned?
Although prices have risen substantially, they are still a long way off the vertigo inducing heights of the mining boom era. The global standard dry bulk measure is the Baltic Exchange Dry Index and it is climbing with gusto but is less than 50% of the peaks hit in 2009.
Container rates have also rapidly increased but with the added difficulty of accessing empties. Globally, empty sea containers are shooting back to Asia to pick up the next load of soft furnishings and iPhones as if they are on bungee cords. The backhaul into Asia is currently worth one eighth of the leg out of Asia and this has meant that the slower and lower value agricultural export supply chains cannot get their hands on them long enough to stuff them full of regional goods.
Rising freight increases the cost of the supply chain with no value add. A tonne of grain or a crate of wine does not taste better because it costs more to transport. In process terms, freight is considered a ‘waste’ and any increase in waste is usually bad. However, WA’s freight into Asia is lower than our primary competitors and the more expensive freight is, the more competitive WA gets.
The chart below represents WA’s competitiveness improvement over the last year and shows that WA is winning - by not losing as much as others.
Although the supply chain stress caused by COVID has been the underlying factor behind increased freight rates, the cost of carbon will keep the pressure on in future. The EU is looking at including shipping in its Emissions Trading Scheme, which involves 50% of any voyage starting or ending in the EU (that French barley replacing Australian barley into China will be even more expensive).
We are witnessing a paradoxical phenomenon where an increase in export cost improves WA’s competitive position. Long may it continue!
